Recent Changes in Tax Rules Affecting Fixed Deposits

Posted on Friday, April 12th, 2024 | By IndusInd Bank

Fixed deposits are popular for stable returns and their tax-saving benefits. As per the interim budget 2024, there has been no change in the tax deduction limit under sec. 80C of the ITA, and investors can continue to enjoy tax benefits of up to INR 1.5 lakhs on their tax saver FDs. Moreover, the recent changes in debt fund taxation will make FDs a more attractive option for various investors in terms of tax savings.

With their promise of guaranteed and steady returns, fixed deposits (FD) offer an attractive investment avenue to investors of varying risk profiles. Tax Saver FDs also provide an opportunity for tax savings, as the principal amount on a tax-saving fixed deposit with a lock-in period of five years is exempt from taxation.

However, FDs may become more attractive to investors with the new debt mutual fund taxation rules that allow debt funds to be taxed in the same manner as fixed deposit accounts. This article will discuss the recent changes in various tax rules that can affect fixed deposits.

Tax Rules in the Interim Budget 2024

Before the interim budget 2024, the market had expectations for a change in the section 80C tax deduction limit. However, in the Budget 2024 speech, Finance Minister Nirmala Sitharaman announced that the tax deduction limit under section 80C of the Income Tax Act will remain unchanged.

In the fiscal year 2024-25, individuals can claim tax deductions of up to INR 1.5 lakhs on investments under section 80C.

Under section 80C of the Income Tax Act, investments in Employees’ Provident Fund (EPF), Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), and 5-year tax-savings fixed deposits are exempt from taxes up to INR 1.5 lakhs in a financial year.

Meanwhile, according to the existing tax rules under section 194A of the ITA, TDS applies to the FD interest earned. This TDS is applicable at 10% if the interest income exceeds INR 40,000 in a financial year and at 20% if PAN card details are not provided.

New Tax Rules for Debt Funds

Until 2022, taxes were applicable on mutual fund investments based on the investment period. Long-term debt funds held for 3+ years were eligible for LTCG tax at 20% with indexation benefits and 10% without. Short-term debt fund investments held for less than three years are short-term tax gains, subject to tax as per the individual’s tax slab.

However, after April 1, 2023, debt mutual funds no longer carry long-term capital gains and indexation benefits. The gains from debt funds, irrespective of their holding period, are now treated as short-term capital gains and subject to tax at the individual’s existing tax slab.

Effect of New Debt Fund Tax Rule on Fixed Deposit Investments

The new tax rule will bring fixed deposits on a par with debt mutual funds as the returns on debt funds are now taxed based on the individual’s tax slab, the same as fixed deposits. Besides, the removal of tax benefits from long-term capital gains on debt mutual funds will reduce their tax attractiveness to investors, as compared to fixed deposits.

Investors with debt fund investments, particularly those in the higher tax bracket, now face higher taxation on their gains than fixed deposits that carry tax deduction benefits under section 80C of the IT Act.

The tax-saving advantages and attractive fixed deposit interest rates offered by various banks could lead to a shift away from debt funds and towards FDs and other tax-saving investments.

Enjoy Attractive Fixed Deposit Interest Rates at IndusInd Bank

With indexation and LTCG taxation benefits no longer in the picture, debt funds are now on par with fixed deposits. With their ability to offer stability and assured returns with fixed interest rates, FDs can help investors keep their funds safe and growing even in a volatile market.

IndusInd Bank offers its customers competitive benefits with a fixed deposit account

• 100% online application process
• Flexible FD tenures
• Higher interest rates
• Multiple options for interest payout
• Tax-saving FDs for 5 years
• Video KYC facility

Grow your funds steadily with an IndusInd Bank fixed deposit. Apply for an FD today.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.